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2 New Black Books In July: RH, WSM, PIR, BBBY, KSS, JCP, TGT, WMT, M, ETH, LZB

Takeaway: 1) RH – Roadmap to $300. 2) Broader ‘Launch’ of the Home Furnishings space – will also present results of our Consumer Survey on the space.

A quick note on two Black Books we just put on the calendar in July.


July 9th

RH: Roadmap to $300

We’ll be releasing a detailed RH Black Book on July 9th with many new thoughts, ideas and analysis that we have not yet articulated, and ultimately will show RH’s Roadmap to a $300 stock. This will include a full real estate analysis (including productivity and profitability estimates for new stores), quantifying the potential for RH Modern, identifying additional growth concepts/ideas, and detailing RH’s sourcing and vendor networks – which are both critical to its growth, margin structure, and capital intensity. Importantly, we’re also going to stress test our Bull case to see where we could be wrong.


July 29th

Home Furnishings Launch/Consumer Survey: WSM, W, PIR, BBBY, ETH, LZB

We’re going to leverage all the work we’ve done on RH and will ’Launch’ more broadly on the Home Furnishings Space.  Relevant tickers (aside from RH) include WSM, W, PIR, BBBY, ETH and LZB – not to mention KSS, JCP, TGT, WMT and M. We think there are some really interesting Long and Short ideas in what is an increasingly bifurcating space. In addition to detail on all these companies and the industry, this Black Book will also include the results of our Consumer Survey on all the different brands/retailers in the Home Furnishings space, and will look at things like price point thresholds for shopping online vs. in-store, spending capacity and shopping patterns for different aesthetics (i.e. traditional vs. contemporary/modern).


We also have other ‘sub-sector’ studies in the works, like we’ve already done for Athletic, Department Stores and now Home Furnishings. Specifically those include Dollar Stores, Home Improvement, and e-Commerce.


CHART OF THE DAY: We Are Still Bullish on Housing

Editor's Note: This is a brief excerpt and chart from today's morning note written by Hedgeye CEO Keith McCullough. Click here to learn how to subscribe. 


...But, but… “how can you be bullish on Housing and not the US economy?” That’s easy. Because I am. So tell your friends to stop whining about it and buy ITB (Housing) vs short Industrials and Transports (XLI and ITB).


Housing is early-to-mid-cycle, whereas Industrials are classic #LateCycle... 


CHART OF THE DAY: We Are Still Bullish on Housing - 06.24.15 chart

Sit, Read, & Wait

“Now we can sit and wait.”

-Wallace Stegner


Allegedly, I’m on vacation this week. There’s nothing like time, fresh air, and space up here on the Big Lake they call Gitche Gumee. “The lake, it is said, never gives up her dead – when the skies of November turn gloomy.”


For those of you who aren’t familiar with either Thunder Bay, Ontario or that Gordon Lightfoot classic… fire it up on your mobile and listen to the ringtone. It will put the manic nature of our profession in context.


The aforementioned quote was one I underlined while I was sitting on the deck yesterday, reading The Angle of Repose. Instead of reacting to every basis point move in the bond market, that’s going to be my call for the summer – sit and wait.


Sit, Read, & Wait - tbay2


Back to the Global Macro Grind


After playing with my kids down by the lake yesterday, I came up to the house to see if anything was “going on” in the marketplace.


Oh my god – oh my god – after realizing that Hedgeye might be right on US #HousingAccelerating (New Home Sales +20% y/y), the Atlanta Fed “raised its Q2 GDP forecast”. Bond Yields Up, Dollar Up – oh my god… what should I do?


  1. SHORT US Dollar (UUP) on the overbought signal
  2. BUY Long-term STRIPS (EDV) on the oversold signal
  3. SHORT Regional Banks (KRE) on the overbought signal


Crazy Mucker, fading the move. I know.


But does the consensus that had been looking for:


  1. > 3% GDP
  2. > 2% “inflation”
  3. > 3% 10yr Yield


… really think that the US Federal Reserve is going to thwart the only thing other than #LateCycle employment gains that’s shocking bears to the upside right now (US #HousingAccelerating) with a pre-emptive rate hike?


I hope so, because that’s what makes a market.


In other US economic news yesterday:


  1. USA’s Markit PMI reading for JUN slowed small to 53.4 (vs. 54.0 in MAY)
  2. US Durable Goods orders dropped -1.8% m/m coming in at -2.5% year-over-year


Yes. That’s a down -2.5% year-over-year recession (post a -3.4% decline in April) in a classic #LateCycle gone bad component of the US economy (and one the Atlanta Fed model didn’t seem to notice).


But the internals of the US stock market did:


  1. US Industrials (XLI) were down another -0.3% on the day to -1.2% YTD (in a green tape)
  2. US Healthcare (XLV) was +0.2% day-over-day to +11.8% YTD


But, but… “how can you be bullish on Housing and not the US economy?” That’s easy. Because I am. So tell your friends to stop whining about it and buy ITB (Housing) vs short Industrials and Transports (XLI and ITB).


Housing is early-to-mid-cycle, whereas Industrials are classic #LateCycle. This, of course, is frequently perpetuated by the broader economic slow-down because the Fed typically eases in response to slowing data à rates fall, and housing works.


Oh, but you’re long stocks on a socialization of leverage in Greece?


Roger that. While that wasn’t my catalyst to “buy everything” into and out of the recent Fed acknowledgment of economic slowing (cutting its 2015 US growth estimate to 1.8-2.0%), I certainly didn’t want to fight that “catalyst.”


That said, every macro catalyst comes and goes. Alongside Greek central-planning-spokesman Tsipras driving Bloomberg.com ad revs today with the latest whatever, you’ll get a reminder of Q1 final US GDP this morning.


While US GDP in Q1 wasn’t nearly as bad as where Durable Goods orders and capex have been (year-over-year) in Q2, to the macro headline chasers Q1 will look bad.


So sit and wait. For Long-term Bond Bulls, bad economic data is good. It’s good for Housing and rate sensitive stocks that look like bonds too. If you want to buy something that’s not at its all-time highs, buy those on down days.


If you need me to react to every tick in between, sorry - I’ll be on my deck reading.


Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:


UST 10yr Yield 2.18-2.41% (bearish)

SPX 2105-2130 (bullish)
RUT 1 (bullish)
Nikkei 208 (bullish)
VIX 11.88-14.12 (bullish)
USD 93.94-95.84 (neutral)
EUR/USD 1.11-1.14 (neutral)
YEN 122.39-124.91 (bearish)
Oil (WTI) 59.34-61.90 (bullish)

Nat Gas 2.66-2.89 (bullish)

Gold 1170-1200 (bullish)
Copper 2.55-2.69 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Sit, Read, & Wait - 06.24.15 chart

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

3 Minutes

This note was originally published at 8am on June 10, 2015 for Hedgeye subscribers.

“If the 130,000 year period since modern humans made their first appearance were compressed into a single day, the era of modern growth would have begun only in the past 3 minutes.”

-Charles I. Jones


The 1st Chart of the Day below from Stanford Professor Chad Jones generated a fair amount of feedback after I presented it on our Morning Macro Show on Monday.  Using data from Maddison, it shows per capita GDP across a cross-section of economies all the way back to the year 1 AD.


I like the chart because it’s a simple but striking reminder that modern growth – in the form of sustained/endogenous growth and contemporary productivity functions – is still a fledgling phenomenon and central banking and monetary policy making are still very much an experiment in progress.


3 Minutes - CoD 1


Back to the Global Macro Grind…


A fundamental constraint of a daily strategy missive with a self-imposed ~900 word threshold and a finite production timeline of a couple hours is that you can’t boil the Macro ocean every morning. 


The format, however, does lend itself well to boiling the daily puddles of data and attempting to appropriately contextualizing those high-frequency macro morsels.


Yesterday we received the NFIB Small Business Confidence data for May along with the Job Opening and Labor Turnover Survey (JOLTS) data for April.   Tomorrow we’ll get the Retail Sales data for May. 


Why do people care about small business confidence?   


Small Businesses represent over 99% of total U.S. Employer firms and >60% of net private sector hiring on a monthly basis – and sentiment around the current and forward prospects for business activity are discretely related to hiring activity and labor compensation trends.


Further, a number of the sub-indices such as Hiring and Compensation Plans have served as solid lead indicators for the corresponding official figures reported by BLS.  For instance, as the 2nd Chart of the Day below illustrates, Small Business Compensation Plans have presaged actual compensation increases pretty well – typically leading growth in reported hourly earnings by ~3 quarters. 


Indeed, the strong advance in NFIB compensation plans over the last 24 months along with emergent strength in the Employment Cost Index (ECI) have backstopped consensus expectations for accelerating wage inflation for the better part of a year and a half now.  The current divergence between Compensation Plans and (lack of) actual earnings growth remains stark and whether the existent spread represents a structural dislocation or if the cycle high +2.3% growth in hourly earnings reported in May represents the beginning of a lagged convergence remains to be seen. 


Wage inflation is a canonical late cycle indicator so it certainly wouldn’t be surprising to (finally) see some degree of acceleration as the payroll expansion reaches its 63rd month off the February 2010 employment trough.  At the same time, with the profit cycle past peak, the prospect of incremental margin pressure via acceleration in labor line costs does not argue for a step function increase in corporate capex spending – particularly with aggregate global demand flagging and the worlds core consumption demographic of 35-54 year olds remaining in secular retreat.   


Why do people care about the JOLTS Data?


#Churn Baby!


While the NFP data offers the official read on net hiring, the JOLTS data provides the internals on the gross flow of both hirings and separations.  A hallmark of an efficient and well functioning labor market is a fluid flow of workers – job openings and the creation of new positions is a direct measure of the economy’s health (or perceived health), and the more that companies are hiring and creating new positions, the easier it is for job-seekers to find work and for skill and need to find their most productive match. 


On a gross basis, 5.007 million people were hired in May (kind of surprising relative to the NFP figures of 100-200K we’re used to hearing, right?) while 1.8 million were laid off or fired and 2.7 million people quit their job.  Job Openings, meanwhile, made a new all-time high of 5.38MM while the Quits Rate continued to approach prior cycle highs. 


Granted, the historical data only go back to 2000 so it’s hard to take an overly convicted view as far as a conclusion.  But as it stands, the domestic labor market remains solid with many metrics at or approaching prior cycle highs – which is probably the larger point.   As we summarized in an institutional note last week: 


Tops are processes & “late-cycle” is not some discrete peak on a Macro sine curve. Move while the music plays but don't be willfully blind to the #LateCycle reality of it all. 


Why do people care about Retail Sales?


A better first question may be:  What is Retail Sales?


It’s a trivial, but not an insignificant question.


In casual conversations with investors, particularly those who aren’t Macro centric, I’d say a majority don’t technically know what Retail Sales encompasses.   Superficially, the term “Retail Sales” kind of connotes that it’s a broad measure of the 70% of the economy that is consumer spending – and most people take it that way.  


In fact, Retail Sales is an estimate of spending at department stores, food service providers, auto dealers, and gas stations.  In other words, it is largely an estimate of spending on goods. 


In other, other words, while it’s a timely, insightful barometer of the prevailing state of domestic consumerism, it doesn’t include spending on services, which comprises the lion’s share of consumption at ~2/3 of household spending and ~45% of GDP


The numbers are also volatile on a month-to-month basis, subject to significant revision and reported on a nominal basis – making it difficult at times to distinguish whether sales trend changes are due to prices or volumes.  What it offers in terms of timeliness, it lacks in terms of precision and magnitude.


Anyhow, the May figures should be markedly better sequentially.  The acceleration in auto sales to 17.7MM (annualized) in May vs. 16.5MM in April will buttress the monthly figures.  Further, consumer revolving credit growth (i.e. credit cards) and spending on durables goods tend to move in directional tandem and with revolving credit rising +11.6% month-over-month annualized in April, it wouldn’t be surprising to see some measure of that show up in the May Retail Sales figures or in a positive revision to the April data.  


Also, it’s worth highlighting that realized improvement in May would only serve to take the year-over-year growth rate up to something like +1-2% - a sequential improvement but a far cry from the cycle peak of +5% growth observed mid-year last year. 


…Having exceeding my character count threshold, I’ll abruptly/awkwardly end the macro miscellany there.  With Keith on the road, you’ll have sufficient opportunity to suffer my pedestrian attempts at dazzling distillations of domestic eco data over the balance of the next two weeks.   


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.06-2.52%

SPX 2072-2100
Nikkei 20006-20469
VIX 13.76-15.40
Oil (WTI) 58.64-61.75 

Gold 1170-1199 


To historical context and the profitable boiling of puddles,


Christian B. Drake

U.S. Macro Analyst


3 Minutes - CoD 2

The U.S. Dollar, Nikkei and Yields

Client Talking Points


There was a clean cut overbought signal for the USD vs EUR and Yen yesterday (see Real-Time Alerts product for timestamps) as the EUR/USD tested the low-end of its 1.11-1.14 risk range and is now bouncing on the Greek headlines.


Get the Dollar (and Yen right), you’ll get Japanese stocks right – big rally in the Nikkei to its highest level since 1996 and with the Yen bouncing here this morning vs USD we would be booking some of those Nikkei gains as it is signaling overbought at 20,899.



Another day, another line of storytelling on why “bond yields are going to breakout” (this time it was our bull case on #HousingAccelerating, which we get – but please don’t look at the Durable Goods print of -2.5% year-over-year!) – 10YR pulls back -4 basis points to 2.37% this morning with no support to 2.18%; great spot to short the Financials and buy Long-term Bonds with those U.S. and Japanese equity gains.


**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET, with Macro Analyst Darius Dale, Restaurants & Consumer Staples Sector Head Howard Penney and CEO Keith McCullough will be dialing in.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Shares of Penn National Gaming are up approximately 9% since it was added to Investing Ideas on May 26. Our Gaming, Lodging & Leisure team reiterates their high conviction on the stock and notes that Ohio and Kansas have both been super-strong revenue generators in the month of May. This positive development has has led our analysts to raise their estimates even higher (and we're already the highest on the street...).


It was a busy week across the housing space with a host of fundamental releases, builder earnings and notable regulatory updates.   Net-net-net....the past week offered another positive update on the state of the residential real estate market with housing turned in a second week of strong, positive absolute and relative performance. The NAHB HMI (Builder Confidence Index) for June surged across all categories and in all regions, posting its best reading in almost 10 years. Total Starts declined -11% MoM to +1.036 MM units with SF and MF starts declining -5.4% and -20.2% month-over-month, respectively.  Permits, meanwhile, rose to an 8-year high advancing +11.8% sequentially and +25% year-over-year.   The strength in permits augurs forward strength in Starts and suggest residential construction spending will be (increasingly) supportive of GDP growth over the next couple quarters.


Bottom line right now remains that Lower-For-Longer is firmly intact as long as US #GrowthSlowing is. As Keith pointed out on Friday, Consensus Macro is still stubbornly sticking to the tired idea that rates have to go higher - they just have to... because, they haven't? All told, it was a great week sticking with the process on the long side of bonds. Here we feature an in-depth discussion from Senior Macro Analyst Darius Dale which does a thorough job outlining where our macro team currently stands with respect to the Fed, interest rates, markets and economy. The prescient discussion occured just hours before release of the FOMC statement.

Three for the Road


Can a Strong Housing Market Carry Economic Expansion? https://app.hedgeye.com/insights/44835-can-a-strong-housing-market-carry-economic-expansion … via @hedgey



The best way to have a good idea is to have a lot of ideas.

Dr. Linus Pauling


Hawaii is now the first state to raise the minimum smoking age to 21, effective January 1, 2016.

The Macro Show Replay | June 24, 2015



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